April 10, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

NEW YORK -- Days after Wall Street firms posted historically awful results for the past year but at a time when a revival appears under way, industry executives met here yesterday to discuss the newest obsession: cost controls.

Mega-salaries, whopping deals and flashy new offices may have been the major themes of the past decade, but the new perspective is more modest.

Facing a 5-year slide from $5.5 billion in profits in 1986 to $2 million in losses last year, the backdrop for the meeting was glum. "The memories are with us," said Frederick J. Wilten, first vice president of Prudential Securities.

But the bull market that has boosted business throughout the securities industry since January had a noticeable impact. "The smiles are back. Otherwise, many of us wouldn't attend," he said, scanning a packed ballroom in the Midtown Hilton Hotel. "But the bad times could return."

The most excessive area of cost growth for the industry, said Michael Goldstein, investment strategist at Sanford Bernstein, a prominent Wall Street research boutique, has been real estate. Overall expenses in this category have risen 13 percent a year during the 1980s, twice the rate of compensation, he said.

"When managing for profitability, space is the biggest area needing improvement," he said.

Compensation and overall employment levels, however, remain the primary Wall Street obsession. It accounts for 60 percent of all costs, said Mr. Wilten, and therefore is a key determinant of the bottom line.

Stiff cost reductions since 1987 have already purged one of every five industry employees. But whether layoffs are enough to change how securities firms compensate who is left remains open to question.

Indeed, according to Bruce McLagan, an industry consultant, the percent of commissions retained by brokers has actually grown from 33 percent in 1967 to 38 percent in 1977 to 40 percent since 1987 as brokerage firms have been fast to bid for top brokers during market surges and too impatient to develop lower-cost brokers on their own.

Undermining a more prudent approach is the industry's inherent instability and continued decline in pricing. Mr. Goldstein said earnings for securities firms are 50 percent more volatile than for other industries.

In addition, pricing is being squeezed on everything from no-load mutual funds to equity underwriting, Mr. Goldstein said. That, he predicts will lead to a continued consolidation throughout the industry.

For instance, he suggests that there is only room for three or four firms with dominant corporate finance relationships with major companies. At the moment, eight to 10 are still fighting for the business.

He contends the industry will continue to shed employment during 1991, though not at the steep rate of recent years, with the only exception possibly being the addition of brokers to fill empty seats.